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Gucci: Internal and External Factors, the Main Challenge and Strategy

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Executive Summary

Gucci is on the list of world’s most valuable brands in 2019 compiled by Forbes (2019). This report includes both internal and external factors which impact the company as well as the main challenge and the marketing strategy. Key internal factors are focusing on product and finance, while the major points of external forces are competitors and the economy. Finally, the main issue and company strategy will be pointed out.

Background to the Firm

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Gucci was founded in 1921 and managed by the Gucci family. However, the poor strategy led to a decline in sales and Gucci was then sold to Investcorp, which brought success because of good management and acquisitions (Nagasawa & Fukunaga 2014). Gucci is the “hottest” brand based on the data collected by Lyst in 2017 (The Business of Fashion 2018).

Internal Factors Affecting the Firm

First of all, Gucci is a luxury goods retailer due to high quality products with Italian craftsmanship and premium pricing. Their target group is high income individuals who are willing to pay more for durable and timeless items with attractive packaging and Gucci logo which raises the value of the products. Gucci also has a strong product portfolio providing the clients a great range of products including small leather goods, handbags and ready to wear for women, men and kid. Every product category has various styles for the purpose of attracting different type of consumers guaranteeing everyone is able to find themselves interested one. All the trendy items are also available in different colours and designs making the fashion-conscious customers satisfied. They are able to personalise their own pieces as well. Moreover, all the products have two years manufacturing warranty worldwide to cover any damage (Burzynski 2018).

On the other hand, a wide range of their product line may pose the risks to brand dilution and it may have negative effects on financials. Gucci has to extend the business activities so they need to invest a lot of money in these events. Although, investing a big amount of money in the business could be helpful in maintaining the brand image, it may prevent them from continuing their business activities and reducing profit margins if their financial position is weak. Also, compared to other brands, Gucci has high inventory levels, which increase more capital investment channels and may affect Gucci’s growth in a long term (Fern Fort University n.d.). One of the reasons for the high inventory is because their product demand forecasts are not that good and it also results in higher possibility of missed opportunities than other brands. Furthermore, Gucci has a high turnover rate of labour so they need to spend more money on employee training as well as development.

External Factors Affecting the Firm

Gucci’s threats include existing competition in the market and their alternative products. According to Bain & Company (2018), the luxury industry is fiercely competitive currently and the luxury goods market is estimated to be approximately $425 billion. The total sales of the top ten luxury goods firms are almost half (48.2%) of those of top 100 one in 2017 (Deloitte 2018). Many brands such as Louis Vuitton, Chanel and Balenciaga have been repeatedly stimulated in Gucci. These fashion brands have really similar products and target group. Especially Balenciaga, which has competed with Gucci last few years even though they are the same parent company, has a slightly cheaper price but offers quite similar products as Gucci. Although LV and Chanel sell similar products, they are at a higher level due to their price and exclusivity. Thus, the level of competition is relatively high and it is hard for Gucci to deal with these brands. In addition, the number of buyers in the luxury industry is small but the buyers bargaining power is strong. Even if the potential customers have their preferable brands, it is easy for them to move to other brands due to their substitution products.

As a global brand, Gucci is easy to be affected by the global fluctuations. Low inflation rates can create more market stability and provide their clients with lower interest rates. The economic growth after the recession is one of the opportunities for Gucci to not only explore new customers but also raise the market share. Emerging economies such as India and China provide opportunities to Gucci as well since the luxury markets in these countries are expanding. Chinese buyers account for 40% of worldwide spending by 2025 based on the research of McKinsey & Company (2019). However, if the trade agreement is changed, it may have negative effects on Gucci’s distribution capabilities having the issues to import products to other countries, thereby profits decrease. The increase in tax prices may affect Gucci’s production capacity.

Major Challenge Facing the Firm

The luxury industry is significantly influenced by new generation buyers who are tech-savvy. It is highlighted by Deloitte (2018) that the ability to communicate with the younger generation is the key to success for luxury brands. Social media is the fastest and easiest platform to express their preference of brands. A great number of luxury brands have increased their usage of social media to interact with younger audiences while striving to maintain their brand value. All the brands have their own unique social media strategy which is focusing on promoting their products and increasing the accessibility of the brand, whilst some brands emphasise more on their traditional customer preference and ideal characteristics.

Moreover, the pet industry has grown rapidly and most competitors have already opened the market. There are many brands including Burberry and Prada who have a product line of pet. They have started offering pet accessories which price range varies depending on the material and design used. A study carried out by Wakefield Research in 2014 illustrated that 76% of Millennials are more willing to spend money on pet clothing than on themselves due to the popularity of social media.

Proposed Approach to Tackling the Challenge

The proposed brand extension is a collection of luxury pet accessories. Based on the pinnacle of the pet industry and the renown of the brand, it is believed that Gucci can be successful in this field. Also, for the purpose of reaching a new generation of shoppers, Gucci needs to be presented on various digital platforms (Glombica 2018). Instagram is one of the best social media, which can show the latest goods while attracting potential customers and connecting with them. For example, Gucci can work with fashion influencers who have pets and provide them pet accessories to post on their page creating confusion and excitement to the audience. Gucci is then able to publicly confirm the brand extension.

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